I have started to sell my residential real estate holdings in Berlin. Not all of them, but some. Have you, like me, considered selling?
When does it make sense to think about a sale?
- The speculation period should have ended. At least ten years should have passed between acquiring a property and disposing of it. Otherwise, the re-turns you generate from any sale will be cut by almost 48% (assuming you are taxed at the top rate for income tax, plus solidarity tax). That is totally unnecessary. In addition, if you sell more than three of the objects you have held for less than ten years, you run the risk of be classed as a commercial property agent. Bearing this in mind, you should seriously examine whether the sale of any property you have owned in Berlin for more than ten years makes economic sense.
- The price multiplier has to be right. Given the current market, I would not think about selling any of my Berlin real estate for less than 25 times the property‘s annual rental income, unless there was a considerable backlog of maintenance, the property was in a second-class location or there were other problems with the building. If there is a potential to increase rents, or the property is in a fairly central location, I would be looking for an even higher multiplier.
Some might ask what they should do with the money they generate via a suc-cessful sale. Even if you don‘t have an answer to this question right now, there‘s no reason not to consider a sale. I‘ll say that again, because it is extremely important: Even if you don‘t have an answer to this question right now, there‘s no reason not to consider a sale.
You don‘t have to do anything right away. A good investor is able to bide their time for the right opportunity, even if that means doing nothing for a year or two. After all, your money is not going to lose any of its value right now just because you don‘t invest it immediately. In many cases, reinvesting straight away can be the worst move. Bad business is often the result of the euphoria generated by good business. Many investors feel invincible after closing a great deal and want to get right back in the game. Time and again, their new investment turns out to be less profitable than the one before. This is why the adage, “Nobody ever died from profit-taking,” is such a stupid saying.
Maybe you will manage to find a new investment in Berlin that is even better than the one you have just sold. But don‘t forget – especially in Berlin – that transaction costs are extremely high, in many cases the equivalent of two years‘ net rental income. Stick with the rule of thumb: If all other parameters are equal in every way for two properties, you need to be able to buy the “replacement property” at a price multiplier at least four points lower than the multiplier you can achieve when you sell.
The emphasis here is on the fact that the other parameters really are comparable in every way. By this, I mean the building‘s substance, location, and rental potential. Of course, it can be good business to sell one object and then buy another at the same multiplier, but only if the second property offers greater potential for rent increases, or is in a better physical condition or location than the property you sell.